Monday, September 01, 2008

SUMMARY:- Techs weigh on market as indices send back the Thursday gains, slide back in the range.- Economic data starting to firm up nicely, but the market is not leading as sharply as you would anticipate.- September arrives with a strong storm as market tries to hold but like needing another test.- A short week will likely keep the waiting game going until the following week.

One reader pointed out the 'Cool Hand Luke' reference from the other night but no one got the children's book, a Charles W. Follett Award winner from 1962.

Up one day, down the next. Market hasn't changed its stripes yet.

After a solid recovery from a downside start, the week looked like a winner on Thursday as SP500 and DJ30 posted a surprisingly strong upside move that took them from the brink of a July low test. Still think that July test is in the cards for those two, but the last half of the week tried to push that further off into the distance. The techs, one of the leaders in this last move higher, noticeably lagged Thursday.

Friday we knew why. DELL missed earnings after Thursdays close and noted that Asia and Europe were slowing. Friday morning MRVL added its own part to that tech story, as it cut its guidance, citing weakening customer demand. MRVL makes the kind of chips that go into iPhones, Blackberries and the like. That undercut those large cap techs, and what was possibly just a Dell specific story became an overall tech story.

Weak personal income (-0.7%) did not help as the stimulus checks ran their course and inflation drained buying power. That gloomy outlook for consumer buying power in the picture weighed the futures and the entire market opened lower. Michigan sentiment was still rather sober, but the Chicago PMI clobbered expectations at 57.9. That jumped the market higher. Oil started to decline after starting the day almost two clicks higher (closed at 115.57, -0.02). Looked promising. Not promising enough. Stocks found no purchase, and indeed no purchasers, on the news. A lunchtime rebound rally held some promise, but it flattened out over the afternoon and sagged lower into the last hour.

It was not a banner session, especially on the heels of the Thursday promise where SP500 and DJ30 turned their near term patterns from threatening an imminent tumble to the July lows into an ascending pattern. They ended up giving back most and in some cases even more than the Thursday gains. About all you can say is that they held their ranges over the past two weeks. That is not that bad as it extends the consolidation, allowing stocks to try and extend laterally and build their bases. As I said a couple of weeks back, the more time they have to work laterally or in a range, particularly the financials, the better it is for the market longer term.

TECHNICAL. Intraday action was low to lower. Two rally attempts were rather modest, and the lunchtime move that held some promise, just ran out of bids. While that is not the worst case scenario, it certainly did not help the price action to end the week.

INTERNALS. Rather lackluster at -1.7:1 after the impressive 3:1 numbers posted by NYSE on the rally sessions. Volume was modestly lower on both NASDAQ and NSYE. Low all week and at least lower on the Friday selling. Again, no dumping and just a lack of bids, and that kept the indices in a consolidation, base-building mode.

CHARTS. NASDAQ couldn't make it past the 200 day SMA for the second time in a week, falling back to close near its 50 day EMA. That puts it right at the bottom of its two week range after falling from the early August peak. SP500 and DJ30 gave up the 50 day EMA they just recaptured on Thursday, though they held at support over the 10 and 18 day EMA. That kept them in their reinvigorated ascending bases . . . by a hair. SP600 tested back to the 10 day EMA, keeping it in decent shape though a long way to go to make the breakout from its 12 week reverse head and shoulders. NASDAQ 100 is the worry. From leader to hanging on for life at the 50 day SMA, closing below the lows in this current pullback. It was a very nice cup with handle base, but it faltered on the break higher last week and really stumbled on the DELL/MRVL earnings and outlooks. It is at a point it needs to hold its pattern and to show the growth indices are still alive. Of course is NASDAQ 100 really a growth index now? AAPL and RIMM, yes, but INTC, MSFT, AMAT and other large cap techs just are not what they used to be. So, it is not necessarily an indication of growth if NASDAQ 100 does not lead, but it is certainly not a good sign when a leading index turns into a laggard.

LEADERSHIP. Pretty much status quo on the session as leaders did little. Some feinted higher early even in the selling, but all stocks had a hard time keeping it up on Friday, so to speak. There was no relative change in the current crop of leadership, e.g. drugs/healthcare, rails, retail, and the scattered smaller techs, business services, etc. Some of healthcare showed some new weakness for the week, something important to watch after Labor Day to see if there is any distribution cropping up in these areas. They have really been the backbone, but the biotechs, particularly the larger ones, are really starting to struggle. Stocks are working on bases, but the market gain is modest, and it is looking for more leaders to step up. Thus far they have not been lining up to make the move. Many more stocks are setting up, but the financials need to get in line as well, and as noted the past two weeks, they are still a long way from 'getting right,' and likely need that next test lower.

THE ECONOMY

Economic data is improving, giving some empirical support to the small cap move, but the gains in the market are just not up to anticipating a big economic recovery.

The data is not bad. A stronger dollar, lower oil, falling commodities prices. Durable goods showed a solid gain in business expenditures with core capital goods purchases up 4% annualized. Housing showed more signs it has bottomed with all areas stabilized and even showing some improvement. The Chicago PMI posted an excellent showing Friday, rising to 57.9 from 50.8; big advance. Q2 GDP was revised up to 3.3%, and though dramatically skewed by surging exports and declining imports, it can't be totally ignored. There is inflation, but inflation pressures are falling according to ECRI and as noted, gold and commodities prices are falling.

Those are some great stories. But where is the market rally ahead of it? The market leads the recovery in economic data. Sure we see signs of it almost contemporaneously as the market starts up, but you have to look hard to find it as in late 2002 and early 2003. The market is the easiest leading indicator to spot. And yes SP600 is leading the move higher and it is the most economically sensitive index. The other indices, while up, however, are not up commensurate with what you would expect ahead of an economic recovery.

Back in 2002/2003 the market jumped higher even as things looked bleak We heard the discussion one morning on CNBC that the traders were saying that the old indicators just did not work anymore. That was the old 'this time it is different' capitulation and, along with the other indications we saw, the bottom was in. SP500 rallied 24% from the October low to the December high. It sold back to test to start 2003, but then rallied 29% into June, ahead of the 7.4% Q3 GDP explosion. Thus far the current move from SP500 is tepid at best, a modest 9.4% from low to high. Not the stuff legends or indications of future economic strength are made of.

Indeed, with the economics improving so nicely, the meager stock market gains are not really forecasting but rather contemporaneously tracking the economic news. The economic data looks good but the market move is mediocre. This could mean this is just a blip in the economic data, a bounce higher thanks to a move in the dollar and an inevitable decline in oil after such a ridiculous speculative run.

Financials are still the litmus test now that oil is off the $130-$140 economy stopping levels. Financials still have a lot of work to take care of before they are ready to move higher and thus the lackluster rallies in the market. You would expect to see the financials near the end of good bases if there was a strong recovery in place. Financials need more work; they along with small caps tend to lead market recoveries as they are the most economically sensitive stocks you can have.

The conclusions? There is likely another test by SP500 and DJ30 toward the July low. That would be necessary in 95% of the cases to complete a bottom. NASDAQ 100 is a worry as it teeters on a breakdown. If it goes again maybe it holds the July lows and sets up a double bottom, maybe not. It would not be a good indication to see an upside leader in the rally turn to a downside leader.

It sure makes it look as if this is a blip in the economic cycle, that perhaps the improving data is a short-term fling given such tepid action in the stock market. Yes stocks are putting in bases, but with the economic data looking stronger than the stock market it could take a significantly longer time period than just a two week test of the July lows. September and October could be the old fearful months that stock market lore has built them up to be.

It is a Greenspan worthy conundrum. There is market improvement but it is basically matching the economic improvement with respect to timeframe and not leading the action. How the market tests the SP500, DJ30 July lows, i.e. how the growth indices hold up during that test, will tell the tale of this move.

THE MARKET

MARKET SENTIMENT

VIX: 20.65; +1.22. Very low. If SP500 and DJ30 give way and fall toward the July lows in September and/or October we want to see this ratchet up. At 20 it has at least 17 points to go, and over 20 would be more in line with historical norms for a real bottom. During 2008 it has bounced to 37 in January, 35 in March, and 31 in July. That is not really enough to set the final bottom.VXN: 24.02; +0.87VXO: 22.59; +1.91

Put/Call Ratio (CBOE): 0.99; +0.17

Bulls versus Bears:

For the second time this year bears are crossing above bulls, doing so basically where they did in March on their way to much more extreme readings just about the time the market made the March low and started the last rally. Positive for the market and if SP500 is going to hold the long term trendline is the place to do it.

This is a reading of the number of bullish investment advisors versus bearish advisors. The reason you look at this is that it gives you an idea of how bullish investors are. If they are too bullish then everyone is in the market and it is heading for a top: if everyone wants to be in the market then all the money is in and there is no more new cash to drive it higher. On the other side of the spectrum if there are a lot of bears then there is a lot of cash on the sideline, and as the market rallies it drags that cash in as the bears give in. That cash provides the market the fuel to move higher. If bears are low it is the same as a lot of bulls: everyone is in and the market doesn't have the cash to drive it higher.

Bulls: 39.3%. Bullish sentiment dissipated some with the fall to start the week, down from 40.7%, the high on this upside cycle since the July low. Last week it moved over the 35% level considered the demarcation between bullish and bearish indications. Above 35% is not as bullish. A long way up from the 27.8% on the low this round. Hit 31.9% two months back and the 30.9% low hit in March. Steep drop from a rebound high at close to 50% on the run through May. In March the indicator did its job with the dive below 35% and the crossover with the bears. Now it is going above and beyond. Bulls and bears have crossed over again, doing so even before the prior lows are hit. The bulls and bears were eye to eye in mid-February and have crossed. A move into the lower 40's is a decline of significance. A move to 35% is a bullish indicator. This is smashing that. For reference it bottomed in the summer 2006, the last major round of selling ahead of this 2007 top, near 36%, and 35% is considered bullish.

Bears: 39.3%. Moving in sync with the bulls, gaining ground as pessimism rises, up from 38.4% the prior week. That is still well off the 43.6% the week before, and down from 50.0% a month back, the high on this move. Still above the 35% threshold so still a bearish indication. A steady rise to 50% on this move: 48.9%, 47.3%, 44.7% and 39.3% before that. A steady, strong rise. Well above the bullish level and the highest since 1995. Again, that is one of the best indications that sentiment is getting extreme on the negative side. It is again past 35%, the level that historically indicates too much pessimism. As with the bulls the jump in bears did its job after hitting 44.7% in the third week of March that was up from an already freakishly strong 43.3% the week before. Up sharply from a low of 19.6% on the last rally. Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). This is a huge turn, unlike any seen in recent history.

NASDAQ

Stats: -44.12 points (-1.83%) to close at 2367.52Volume: 1.586B (-1.47%)

Up Volume: 278.242M (-1.043B) Down Volume: 1.291B (+1.017B)

A/D and Hi/Lo: Decliners led 1.72 to 1Previous Session: Advancers led 2.73 to 1

A second failure at the 200 day SMA in a week sent NASDAQ back toward the bottom of its two week trading range, closing just below the 50 day EMA (2363). Not a major breakdown, just more of the same recent bout of weakness as the techs cannot get off the mat. Of course this is low volume rang trading in what is trying to be a handle to a 10 week cup base. That is what NASDAQ 100 was doing before it started to get top heavy of late. Definitely a point where NASDAQ has to find support if this rally is going to make a next move.

NASDAQ 100 (-2.22%) was the barking dog of the session and of the past week as it fell hard Monday and Friday, ugly bookends to a down week. It closed at a new low since the early August high, holding close to the 50 day SMA on Friday. It can hold here and still rebound, but it has turned a very promising pattern into a do or die test.

Thursday tried to change the character of the last 7 weeks and it did. Friday gave back the Thursday gains and the 50 day EMA, but still did not upset the renewed vigor. Didn't do it a world of good, but even with the selling SP500 landed right in the middle of its trading range. That leaves it in shape to continue higher, but again, it has to have the financials to make a real bottom, and they need more time. So, SP500 can continue laterally while they base or more likely it will test the July lows once more before this is through. That is just a historical thing: make a serious new low after a prior double bottom attempt and you typically have to go back and test it. Given the shape of the financials, that makes this somewhat more probable.

SP600 (-1.01%) kept up economic recovery hopes as it was down the least. It also held near support at the 10 day EMA on the intraday low. It remains in solid shape in its 12 week reverse head and shoulders, but also 12 points off a breakout over the early June peak, another almost 4% move from here. That is a lot of ground to cover just to get to a breakout.

Similar to SP500, the Dow turned back, giving up the 50 day EMA (11,922) but managing to hold the 10 day EMA in the middle of the trading range. It is notable that it got close but did not really challenge key resistance at 11,750 and the August closing high at 11,783. Took a turn for the better Thursday, still hanging on Friday, but quick turns always make things more problematical. As with SP500, in order to try and put any finishing touches on a real bottom, history says it needs to test the July low down at 10,827.

Stats: -171.63 points (-1.47%) to close at 11543.55VOLUME: 169M shares Friday versus 149M shares Thursday. Volume was still below average, but it is notable that Thursdays rising volume was trumped by Fridays higher selling volume.

The week after Labor Day is always one faced with a bit of trepidation. September is typically a down month for the market. Post-Labor Day has launched some ugly dives lower in history in other bear markets. A hurricane is going to be bearing down on some part of the US Gulf coast. The market is in a weak uptrend off the July lows. A passel of economic data, including the ISM, factory orders, and the unemployment report are due. Vacations are supposed to end, but typically they don't until the following week, leaving that low volume suspense (more like grind?) to continue at least through the short week.

Improving economic data, a tepid stock rally with NASDAQ 100 flipping from strong to hanging on, the start of September, and a storm approaching all make for a market crossroads. We still anticipate a NYSE large cap test of the July lows, but at the same time they are in position to continue higher from here. That means they could rally and never look back, but likely it means that if they can pull off a further really here it is likely only temporary or borrowed time. SP500 made 1313 on the early August run, just 3 points off a 50% retracement of the May to July losses. DJ30 came within 150 points of a full 50%. NASDAQ blew on through.

The market is definitely attempting to put in a bottom; it is going through the process of lateral movement in a narrow range. With September coming and that July low hanging out there on SP500 and DJ30, again we look for a downside test still to come, the question is how much higher this bounce attempt can move.

As next week starts, any additional rally will be used to close out the marginal upside positions as discussed this past week. Most positions had little relative change on Friday, and most are holding above support at worst or enjoyed decent runs on the week though Friday muted the moves somewhat. The very strong we can keep, but those that fell farther than near support and then rebound but modestly are the targeted ones. And of course any big surges even by the strongest should tell us to bank some of the gain.

We won't give up on new upside plays as there many stocks out there in position to move higher. That is what a consolidation such as this one does. Also, as noted above, we could see more upside where these stocks break sharply higher and can make us at least some short term gain. While we think SP500 and DJ30 will test the prior low and that will impact the other indices, that does not mean they will take down all stocks. There are a lot of strong patterns out there right now that can make us some money to the upside as the market continues working through the process. Again we won't turn away from them we just shorten the sights a bit with respect to what we get out of the move given the market still likely to need that test.

The downside is also there if there is a test, and since we are looking at SP500 and DJ30 falling to test the July low we are looking at downside plays on those, adding to the SP500 downside if that move starts anew. EEV is another opportunity as well after this modest bounce by the relief bounce in the emerging markets. We take any downside that rolls in off the current upside, watching for the July lows to see if they stop any selling and turn the large cap NYSE back up. How the financials look at that point will also tell investors more about whether the work has been done to turn the entire market back up.

Support and Resistance

NASDAQ: Closed at 2367.52Resistance:The 50 day EMA at 23692370 from the April 2006 peak2378 is the mid-February peak; 2379 from the October 2006 peak2386 is the August 2007 intraday low2388 is the June 2008 low2392 is the April 2008 peakThe 90 day SMA at 2395The 200 day SMA at 24132419 is the January 2008 peak and the early February peak2451 is the August closing low2474 is the July 2008 peak2483 is the mid-June interim peak2500 from interim August 2007 lows and early May 2008 interim peak2551.50 is the May peak; 2550 is the June peak2603 is the early January gap down point

Support:2353 is the trendline from the summer 2004/July 2006 lows, Q4 2005 consolidation2340 from the March 2007 low2286 is the first April 2008 gap up point.2261 is a March 2008 interim low2202 is the January 2008 low2155 is the March 2008 low

S&P 500: Closed at 1282.83Resistance:1313.15 is the August 2008 peak1317 from the February low1320 is a 50% retracement of the May to July selloff1324 is the April lowThe 90 day SMA at 13241331 is the June low1352 is an ancient trendlineThe 200 day SMA at 13591370 is the August 2007 intraday low1374 is the March 2007 closing low1387 is the April 2008 intraday high1396 is the February 2008 peak1406 is the August and November 2007 closing low

Support:The 50 day EMA at 12891285 is the recent July peak1270 is the January low1257 is the March low1244 is an August 2005 peak1240 to 1221 are September 2005 peaks1234 is the July 2006 low1234 is the late July low1224 is the June 2006 low1176 from the Q4 2005 lows1167 is the January 2005 low1154 from the May 2005 lows1142 is the 2005 closing low

Dow: Closed at 11,543.55Resistance:11,665 is the 2004/2005 up trendline11,670 is the May 2006 intraday high; 11,642 closing 11,731 is the March 2008 low 11,867 is the August 2008 peakThe 90 day SMA at 11,97511,982 is a 50% retracement of the May to July selloff12,050 from the March 2007 12,070 from the early February 2008 lows12,250 from late March 2007 lows The 200 day SMA at 12,36312,518 is the August intraday low12,573 is the mid-February high12,743 is the November low12,750 to 12,768 is the February 2008 peak and a series of lows and highs from August 200712,786 is the February 2007 peak12,845 is the August closing low13,092 is the December 2007 intraday low13,133 is the May 2008 high

Support:11,634 is the January intraday lowThe 50 day EMA at 11,61711,565 is the up trendline off the July low11,388 is the prior August low11,317 from March 200611,131 is the late July 2008 low11,061 from February 200610,912 peak from March 200510,854 from December 200410,701-10,705 from July 2006, July 2005

Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.